Reverse outsourcing takes off as rising costs hit Indian IT firms

BANGALORE, India, 13 September Indian IT firms that thrived on the outsourcing boom in the West are themselves headed offshore, from Malaysia to Mexico, to escape the double sting of surging salaries and a rising rupee.

Tata Consultancy, Infosys, Wipro, Satyam and smaller companies are stepping up acquisitions and opening more facilities closer to US and European clients to cut costs -- the reason why work was farmed out to India in the first place.

Salaries of software professionals rose 18.7% in 2007, a survey showed today, while the rupee has gained almost 10% this year to near 10-year highs against the dollar.

That’s eroding the cost advantage once enjoyed by the $50 billion information technology industry, which bills two-thirds of sales in dollars but whose expenses are almost all incurred in rupees.

IT firms are “off-shoring” work to time zones and locations nearer their clients in a reversal of the trend that made Bangalore, India’s Silicon Valley, the favourite back-office of the world’s biggest companies.

Bangalore also gave the English language a new slang verb: being “bangalored” in the US meant a person had lost his job because it had been handed to an IT company in India that would do it for a fraction of the cost.

The term looks set to lose its pejorative punch as the same IT industry, which employs 1.63 million people at home, creates and sustains thousands of jobs abroad.

This week Wipro opened a facility in the Mexican city of Monterrey to service American and European clients and Satyam launched a software centre in MSC Malaysia, a government-designated high-tech zone.

“In the past, we viewed off-shoring as India-centric, but we do not do it any more,” said Satyam founder B. Ramalinga Raju, who on Monday opened the centre to support business in the US, Southeast Asia and the Middle East.

“We look at off-shoring as delivering through high-quality workforce in lower-cost countries,” he said.

Hyderabad-based Satyam has hired 300 mostly-Malaysian IT engineers to man the facility, whose workforce will rise to 2,000 in four years to cater to clients such as GlaxoSmithKline, one of its top 10 customers.

Malaysia was chosen because of its “competitive cost environment,” said Raju, whose company is distributing work to locations where “it makes the most business sense.”

Wipro will add to the 100 employees it hired in Mexico and invest in other lower-cost locations, said chairman Azim Premji, who in August paid $600 million to buy US-based outsourcing firm Infocrossing to serve American clients.

Mumbai-based Tata Consultancy, India’s top software maker, opened a centre in the Mexican city of Guadalajara with 500 employees and said it will employ “thousands more” in the next five years.

Mexico shares a similar time zone with and is within five hours flying distance from anywhere in the US, enabling TCS to provide “nearshore services” to clients, the company said.

Infosys Technologies opened a 400-person facility in the Czech Republic to service European clients and purchased the service centres of Royal Philips in Poland and Thailand besides India. It’s also weighing potential acquisitions.

At home, wage bills are rising as Indian firms compete with multinationals to hire and keep scarce software talent.

The IT industry’s average annual salary rose 11 % this year to Rs620,000 (15,320 dollars), said a survey by the market-research firm IDC India for Dataquest magazine, a considerable amount in a country where the per capita income is less than $900.

“Indian tech companies must find a way out of this ever increasing wage rise as rupee appreciation squeezes their margins further,” said the industry survey.

The rupee is rising on inflows of billions of dollars into an economy growing 9% a year.

But costs alone are not driving the “dispersal of the IT industry around the globe,” said Kiran Karnik, president of the industry grouping National Association of Software and Service Companies, or Nasscom.

“Cost optimization is just one reason,” he said. “Proximity to clients is also important, both geographically and culturally. If you want to serve clients in the US or Spanish-speaking Latin America, it makes sense to be in Mexico.”